Essay – International Finance

1. Gather data on Italy for the last 20 years using top economic variables like:

real exchange rate, current account balance (as % of GDP), real GDP, employment, government debt and government budget deficit.

Analyse this data for a basic description in light of the competitive external position of Italy against Germany.

2. If Italy exits the Euro zone and returns the national currency to the lira and the Italian government decides on export led growth.

a. What kind of exchange rate and macroeconomic policies could they use?
b. How will the Euro exit short term risks, affect the Italian economy?


The global economy crisis had a significant effect on Italy than expected. Real GDP growth contracted by 1.1% in 2008 and 5.2% in 2009 (OECD,2012). Public confidence has also been affected towards the Euro questioning the benefits and trust with European Central Bank. While policymakers are fully aware of the crisis, Italians are not confident with the Euro (European Commission, 2008) and 53% agree the Italian lira would perform better than the Euro (European Commission, 2009). Although Italians have a long tradition as pro European Italian politicians are quiet on the subject of Euro membership (Jones, 2009).

This paper analyzes the prospects if Italy exits the Euro zone. The first section shows how Italy has performed in the Euro zone highlighting its position against Germany. The Deutschmark was the anchor in European Monetary System (EMS) and when United Kingdom left Exchange Rate Mechanism (ERM) in 1992 it caused exchange rate disorder and where Italy decided to devalue the Lira. The second section analyzes in detail the exchange rate policies and other macroeconomic policies that the Italian government could adopt within Mundell Fleming model. The third section then looks at some short-run risks on Italy’s economy from leaving the Euro zone (EZ) and adopting the Italian lira.

Findings show if Italy exits the EZ they will have full control over macroeconomic policy to achieve external balance but will have to resolve serious risks that could worsen the economy further.



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